In the latest twist on the Microsoft-Yahoo! soap opera, Microsoft issued a statement today, announcing that they were back in the game, but this time looking to make a deal for “an alternative that would involve a transaction with Yahoo! but not an acquisition of all of Yahoo!”. While reserving the right to “reconsider that alternative depending on future developments and discussions that may take place with Yahoo! or discussions with shareholders of Yahoo! or Microsoft or with other third parties.”

Sources said that Microsoft, in its long-running war with archrival Google, wants most of all to grab Yahoo’s search ad business to become a credible #2 in the important sector.

Yahoo would would like to keep its online display ad business, its communications assets, including mail and instant messaging, as well as its many content properties.

These are all areas where Yahoo actually excels and should have been focusing on in the first place, instead of competing with Google in search.

In fact, sources said, when Microsoft was considering involving News Corp. in its unsolicited bid to buy Yahoo, it was going to own the search and search ad business, while spinning off all content and communications assets into a separate company that would also include New Corp.’s MySpace.

There are a couple of reasons this makes sense. First off, Yahoo! is between a rock and a hard place. It MUST do something, or shareholders, including Carl Icahn, will tear the company apart in order to get fair value. Even if Yahoo! can hold off Icahn (and there are some indications that it might be able to do that, if Microsoft were to remain out of the game), it faces intense shareholder scrutiny, lawsuits present and future, Google circling the waters smelling blood, and the Microsoft elephant in the room. Not a pleasant way to face a business day.

1. Innovate and disrupt in search – We will disclose some elements of our plans with this week’s release of search and sharpen our focus on user experience and business model innovation. The work we have done over the last 4 years on search has established a solid foundation to build upon. 2. Win targeted distribution – With this release of search, we are now ready to throttle up broader distribution initiatives. 3. Reinvent portal and deliver new experiences across PC, phone and web – We are building our new releases of Windows 7, Windows Live wave 3, Windows Mobile 7, Internet Explorer 8, Search and MSN with an eye towards optimizing and unifying experiences and scenarios. 4. Fix our online branding – Our brands are fragmented and confusing today, and we recognize a need to clarify and align our online branding. We are now driving forward to address this opportunity. 5. Win in display advertising – We have an advantage in tools, agency assets/relationships and a team laser-focused on capturing the display ad platform opportunity. As we build from a position of strength, we will increase engineering resources to drive even more innovation. 6. Build on our strengths in Europe – As measured by comScore in March, our online business in Europe is doing well. We have over 3 times the page view volume and nearly 7 times the minutes of usage compared to Yahoo!, and 68% reach to internet users throughout Europe. We will double down on our investments in Europe and expand on this strong position. 7. Expand strategic partnerships – In addition to our organic innovation agenda, we will expand strategic partnerships that increase inventory on our display ad platform, enable new paradigms in search and accelerate growth in key geographies. 8. Pursue small, targeted acquisitions – Looking forward, we will focus on small, targeted acquisitions that support our work in search, complement our value in the ad platform and help us grow scale in key geographies. Recent acquisitions including Rapt and YaData are examples of these types of acquisitions.

(emphasis mine)

For Microsoft, acquiring just the search business from Yahoo! would seem to fit in well with these goals. What is interesting about Google is that while they have dominance in text based advertising around search, a market they basically created, that market may not look anything like it does today in 5 or 10 years time. Microsoft doesn’t need to win that space, it just needs to “innovate and disrupt”, and win in the next round.

Of course we may have to wait until next weekend (and wouldn’t it be fitting if this all came together on US Memorial Day weekend, thereby capping the ruination of any semblance of a real life for tech journalists?) for this all to play out, but Microsoft wants search share, Yahoo! needs to fend off the sharks, there’s billions of dollars just burning a hole in Steve Ballmer’s pocket, and left unchecked Google will just keep getting stronger. In his letter, Kevin Johnson mentions the Advance08 advertising summit on Microsoft’s campus. I’ll be there, and can’t wait to fill you in on what happens next.